Oct 24, 2012
Executives
Jill Greer – Managing Director, IR Richard Anderson – CEO Ed Bastian – President Paul Jacobson – SVP and CFO Glen Hauenstein – EVP, Network Planning & Revenue Management
Analysts
John Godyn – Morgan Stanley Dave Fintzen – Barclays Capital Jamie Baker – JP Morgan Michael Linenberg – Deutsche Bank Savanthi Syth – Raymond James Glenn Engel – Bank of America Merrill Lynch Duane Pfennigwerth – Evercore Partners Hunter Keay – Wolfe Trahan Dani McKenzie – Buckingham Research Bob McAdoo – Imperial Capital Helane Becker – Dahlman Rose Josh Freed – Associated Press Andy Compart – Aviation Week Karen Jacobs – Reuters Mary Jane Credeur – Bloomberg News Ted Reed – TheStreet Kelly Yamanouchi – Atlanta Journal-Constitution Linda Loyd – Philadelphia Inquirer
Operator
Good morning, ladies and gentlemen, and welcome to the Delta Air Lines September 2012 Quarter Financial Results Conference Call. My name is Cynthia and I will be your coordinator.
At this time all participants are in a listen-only mode until we conduct a question-and-answer session following the presentation. (Operator Instructions) As a reminder, today’s call is being recorded.
I would now like to turn the call over to Ms. Jill Sullivan Greer, Managing Director of Investor Relations for Delta.
Jill Greer
Thanks, Cindy. Good morning, everyone, and thanks for joining us for our September quarter call.
Joining us from Atlanta are Richard Anderson, Delta’s Chief Executive Officer; Ed Bastian, our President; and Paul Jacobson, our Chief Financial Officer. Richard will open the call.
Ed will then address our financial and revenue performance, and Paul will conclude with a review of cost performance and liquidity. We have our entire Executive team with us for the Q&A session and to get in as many questions as possible during the Q&A please limit yourself to one question and a brief follow-up.
Today’s discussion contains forward-looking statements that represent our beliefs or expectations about future events. All forward-looking statements involve risks and uncertainties that could cause the actual results to differ materially from the forward-looking statements.
Some of the factors that may cause such differences are described in Delta’s SEC filings. We’ll also discuss non-GAAP financial measures.
All results exclude special items unless otherwise noted and you can find a reconciliation of our non-GAAP measures on the Investor Relations at delta.com. And with that, I will now turn the call over to Richard.
Richard Anderson
Good morning, and thank you for joining us. Today we announced a September quarter profit of $768 million or $0.90 per share and an operating margin of 10.2% excluding unusual items.
On a GAAP basis our net income was $1 billion. I’d like to thank the entire Delta team for staying customer focused and running a good operation while producing strong financial results.
Delta is quite unique in the global industry with strong employee relationships. Our people are committed to make Delta the best and we are not distracted from serving our airline and its customers.
That unique quality de-risks our business and is good for our equity holders. We look forward to rewarding our employees with well-earned profit-sharing checks in February which totaled $309 million in profit-sharing accruals year-to-date.
Delta’s strong third quarter results combined with industry-leading operations and customer service reflect the benefits of steady execution of our strategies across the business and our prudent investment in the airline. We now have a product network and operation that customers are willing to pay a premium for.
During the quarter we produced an 8.3% revenue premium to the industry – our best performance on record. We have generated a revenue premium to the industry 18 months in a row and we intend on continuing to do so.
Our operational performance this year has been quite good. For the last 12 months our all-time performance is running at about 87% domestically and our completion factor is 99.7% which may be a record for a major airline.
Our DOT mishandled bag rate was down 18% from the prior year and we had a 35% decline in DOT customer complaints. Since 2007, our system bag claims have declined 66%.
Looking forward, we continue to have a positive outlook on RASM yields and loads in the December quarter. This is based on corporate revenue gains and Ed will discuss that in much greater detail, a strong global network, superior product and facilities.
Our October unit revenues will be up 4% to 5%, our capacity down 1% to 3% and we expect the December quarter to produce good profitability with an operating margin of 4% to 6%. With our consistent investment in the business and significant capacity reductions our non-fuel costs have grown faster than we would prefer in the past few quarters and this trend will continue into the first half of next year.
The actions we are taking now which include a $1 billion structural cost reduction over the next two years will allow us to maintain strong financial performance and free cash flow yield while laying the foundation for future revenue growth, cost efficiency, margin expansion and consistently hitting our return on invested capital targets. We are managing fuel, our top cost item, by taking the unique step of operating a refinery to address high jet crack spreads.
Our refinery turnaround is progressing well under the leadership of Jeff Warman and our trainer team. We expect to be at full production by first quarter of 2013 and we expect a positive trainer contribution in 4Q.
Paul will go into greater detail about our fuel positioning. We are working to change the cost dynamic in this industry around fuel and our results from trainer and the events in the industry have validated our strategy.
Delta will continue to take industry-leading action to control fuel expense by managing capacity, fully pricing our products to cover fuel costs, operating our refinery and deploying effective purchasing and conservation strategies. We will continue to prudently manage our capital spending in order to ensure that we generate strong free cash flow yields for our shareowners and we will continue our march to pay down debt.
With $5 billion of debt reduction already complete interest savings already generated are substantial and there is more to come as we approach our $10 billion target over the next year. In this quarter we paid down $270 million in debt bringing our adjusted net debt down to $11.9 billion.
Debt pay down is important for our equity holders as it is the most accretive way for Delta to improve its EPS and derisk the business. Finally, our $1 billion program of structural cost initiatives is important to maintain our unit cost advantage.
The biggest part of this initiative is our domestic fleet restructuring which will fundamentally change our cost dynamic as part of our three year financial plan while simultaneously providing a superior product to our customers. We will begin to see those fleet restructuring benefits in the back half of 2013.
The recent agreement with our pilots was critical to this initiative and our unique employee relations are instrumental in that effort to transform our fleet by up gauging across our domestic network. The other initiatives in our cost reduction efforts will focus on maintenance savings, technology and process-driven efficiencies.
The path we are taking has demonstrated that it is right for our shareholders, employees and customers. 2013 will be our fourth consecutive year of good profitability and free cash flow yields.
While investments are producing results we must and will expand our margins and hit our ROIC target of 10% to 12% on a consistent basis over the next several years. The strong financial foundation we have built is what allows us to move the focus away from a short term focus to positioning ourselves for long-term expansion, sustained profitability and shareholder returns.
Thank you for joining us. And with that, I’ll turn the call over to Ed.
Ed Bastian
Thanks, Richard. Good morning, everyone.
As Richard mentioned, excluding special items, Delta reported a $768 million net income for the September quarter or $0.90 per share. This is in line with first call consensus.
We had $279 million in net gains from special items which produced a $1 billion GAAP net income for the quarter. Special items included a $440 million gain from mark-to-market adjustments on fuel hedges, a $39 million gain from the slot exchange with U.S.
Airways, $78 million in charges related to debt extinguishment, severance and related expense, and $122 million in facilities fleet and other charges which include the charges resulting from the closure of Comair. I’d like to take this opportunity to thank the Delta team for their work in producing another strong quarter for both financial and operational performance and I’m happy to announce that we set aside $174 million in profit sharing this quarter, bringing our year-to-date profit sharing accrual up to $309 million.
During the quarter our top line revenue increased $107 million or 1% on a 1.5 point decrease in capacity. Passenger revenue grew $124 million driven by a three point improvement in yields.
Our passenger unit revenues increased three points against a difficult base comparison period driven in part by corporate revenue gains. Cargo revenue decreased $40 million due to economic softening that we experienced in the Pacific region which resulted in a 10 point decline in cargo yields.
Our other revenues were flat year over year as a decline in MRO volumes were offset by higher coach share and SkyMile revenues. We have solid unit revenue performance across all entities during the September quarter.
Our domestic unit revenues increased 3% on a one point decline in capacity. We continue to see strength in corporate revenues and we are pleased that our LaGuardia unit revenue was flat year-over-year despite the 42% increase in capacity from our new slot portfolio.
This bodes well for our long-term LaGuardia strategy. In the trans-Atlantic we saw the benefit from our proactive 5% capacity decrease as unit revenues increased three points despite the adverse macroeconomic outlook and a weak euro.
Our Pacific performance was the best in the network as we saw a six point unit revenue improvement for the quarter due to strong yields and load factors on both the transpacific and intra-quart flying. Our land franchise was solidly profitable during the quarter with year-over-year unit revenue growth roughly flat on a three point increase in capacity.
We continue to gain traction in corporate revenues with our corporate revenue bookings up 8% over the last four weeks. We continued to see strong double-digit year-over-year performance in financial services and banking and our manufacturing and technology sectors each grew at 9%.
We’re making good progress on our revenue initiatives. Year-to-date, 2012 our first-class up-sell program has generated a paid first class load factor of 32% which is up seven full points from the prior year and we continue to see strong revenues from our popular, economy-comfort product.
For the September quarter we generated a 106.7% system index as measured by the A4A RASM benchmarking. This represents a 2.3 point year-over-year improvement in revenue market share.
I’d like to thank the entire Delta team for the outstanding revenue performance we’ve seen this year. In terms of our outlook our December quarter bookings are shaping up well for both the yield and load factor size.
For the month of October, we anticipate that our unit revenues will increase 4% to 5% driven by corporate revenue strength and continued capacity discipline. We’re seeing positive trends in November despite difficult comps and slow demand during the election week.
The month of November will be our second most difficult year-over-year comp this year, second to September, so we expect November to post smaller year-over-year gains than we are experiencing in October. Domestic demand for the quarter looked strong.
We experienced good leisure demand around the Columbus Day holiday and we are optimistic that leisure traffic will also be robust for the Thanksgiving and Christmas holidays. In New York we’re seeing positive trends in our enhanced LaGuardia network as well as on our Transcons out of JFK which are benefiting from the upgrades we’ve made in our business elite product.
Our Transatlantic outlook for the December quarter is solid despite the economic backdrop as the entity is benefiting from both Delta and our JV partners capacity discipline, product improvements and continued corporate revenue share gains. Pacific demand has held up well for October although we anticipate some pressure for November and December due to tougher comps and higher industry capacity levels in Tokyo.
And on the corporate side we continue to see strength out into the quarter. In our quarterly survey of corporate travel managers, 82% anticipate that travel spend will remain either the same or increase versus prior year for the December quarter and the level of optimism for travel spend growth improves as we move forward into 2013.
For the company’s guidance, we’re forecasting a solidly profitable December quarter with an operating margin, as Richard said, of 4% to 6%. We are forecasting our December capacity to be down 1% to 3% with domestic capacity down 1% to 3% and international capacity down 2% to 4%.
With that, I’ll turn the call over to Paul.
Paul Jacobson
Thank you, Ed, and good morning, everyone. During the quarter our nonfuel unit costs increased by 5.6% and we expect to see a similar level of growth in the December quarter.
While due in part to our capacity reductions, we’ve continued to experience cost pressures from the investments that we made in the business. The 5.6% increase was driven primarily by wage and benefit changes which accounted for roughly half of the increase and maintenance costs which were up $65 million for the quarter.
This maintenance increase was largely due to a one time acceleration of engine inductions to take advantage of favorable vendor pricing as well as initiatives aimed at improving our operational reliability and positioning us for future efficiencies. As we look forward, we expect maintenance expense to be roughly flat in the fourth quarter the prior year.
Up to this point, our margins have expanded through a period of product investment in cost increases. While this trend will continue into the first half of next year, now is the time to lay the foundation for future margin expansion through our $1 billion program of structural initiatives.
We anticipate these initiatives will generate significant savings beginning in the second half of next year while maintaining a high-quality product, network and operation that we have built. These initiatives will produce comprehensive structural changes to the way we do business at Delta.
They are not easy and it will take some time and some upfront cost to implement but when we are complete, we expect them to take our earnings power to the next level. The initiatives are focused in three broad categories.
The first category is our domestic fleet restructuring. As far as this effort, we will be updating our fleet by replacing 50-seaters with mainline aircraft and larger regional Jets.
The mainline aircraft begin arriving next summer with the arrival of both the 717s and the 737-900s. These new aircraft are expected to generate significant operating and maintenance savings.
This up-gauge our fleet is a good fit for our system and enables us to leverage the benefits of consolidation and our scale. In addition, the associated 50 seat retirements will allow us to avoid significance maintenance expense in the future.
The second major category is maintenance savings. In addition, to the savings associated with the 50 seat retirements we have a comprehensive focus on reducing material expense by capitalizing on used aircraft purchases and part-outs.
The final category technology and process driven savings. We will leverage the investments and continue to leverage them that we’ve made in our systems and our Delta.com platform to improve distribution expenses by continuing to ship more share to Delta.com.
In addition, we have initiatives underway targeted in improving logistics, lowering vendor expense and maximizing the benefits from our investments in our scheduling systems and facility. We will discuss these in more detail at our Investor Day in New York in December.
Turning to fuel, Delta paid $3.14 per gallon during the September quarter, $0.05 higher than prior year. We had $26 million of settled hedge losses during the quarter.
Based on Friday’s market close, we are projecting a fuel price of between $3.15 and $3.20 for the December quarter. Production levels at Trainer are continuing to ramp up and we are pleased with the initial results we’re receiving from the facility.
Jet fuel production began in September and we anticipate the refinery to be at full production run rate in November. Based on recent curves, which have been highly volatile, we expect Trainer’s production to generate a contribution of break even to $25 million for the December quarter.
Shifting now to liquidity, we ended the September quarter with $5.1 billion in unrestricted liquidity which included $1.9 billion in undrawn revolving credit facilities. Our operating cash flow for the quarter was $545 million and we generated $120 million in free cash flow.
Capital expenditures for the quarter were $425 million of which $275 million were for fleet investments which included deposits for new aircraft, induction costs for used aircraft and continuing our fleet modifications including flatbed installations. During the quarter we paid down $270 million in net debt ending the quarter with an adjusted net debt of $11.9 billion – another step forward in our delevering strategy.
This is the first time since 2007 that our net adjusted debt has been below $12 billion. Our debt reduction has already produced $60 million in interest expense savings for year-to-date 2012 as compared to prior years including $34 million in the September quarter alone.
While we are focused on reducing our debt we are also working to lower rates across our overall debt portfolio. To that end this month we refinanced $1.7 billion in debt and undrawn lines of credit secured by our Pacific groups and slots.
Strong investor demand for this transaction allowed us to upsize and provide very cheap liquidity, maintain our revolver and still achieve an all-in interest rate at 4.5%. We anticipate achieving more than $30 million in annual interest savings from this refinancing alone.
To wrap up, we had a good September quarter with good profitability and further debt reduction. I’m proud of the work the Delta team has continued to do this quarter and I’d like to thank the Delta employees worldwide for their dedication and determination as we continue the hard work of building a better airline for the long term.
I’m excited about the steps we’re taking for the future and look forward to sharing more with each of you at Investor Day.
Jill Greer
Thank you Richard, Ed and Paul. Before we move to questions I did just want to take a minute and remind everybody as Paul mentioned about our annual Investor Day which will be held on December 12 in New York.
So please mark your calendars. We’ll send out more information shortly and we hope to see you all there.
So with that, Cindy, could you give everybody the instructions for the Q&A process.
Operator
Thank you, Ms. Greer.
(Operator Instructions) Our first analyst question comes from John Godyn with Morgan Stanley.
John Godyn – Morgan Stanley
Great job with gaining corporate travel share, but I think there’s a bit of a concern that you’ve over-earned on corporate travel in recent years just given the challenges that some of your competitors have had. As we think about a world where American is getting closer to emerging from bankruptcy alone or not, to what extent do you think your corporate travel share is going to be put at risk?
Ed Bastian
John, this is Ed. Thanks for your compliments.
We’ll try hard to make certain that we maintain all the share that we’ve acquired to date. A fair bit of the share that we’ve acquired is truly new share as we brought the benefits of our investments in product and technology, facilities in New York, facilities in Atlanta.
So I don’t anticipate there is going to be a dilution of that as we look forward. I think any future change in the industry will be positive for everyone.
I know we’ve had in the most recent weeks certainly some share gains from some of the problems that American has had but they’re relatively modest and candidly are not big numbers of that share gain that we’ve seen.
John Godyn – Morgan Stanley
I guess the concern is more on the economics of the business too – not just the share. When we think about potential consolidation just for the economics of corporate travel going forward, is that specifically a negative or a positive on corporate travel isolated?
Richard Anderson
This is Richard, John. We think that further industry consolidation will be overall quite good for Delta and quite good for the industry and believe that if you look at the current organizational construct of the industry we need the next transaction to be completed.
And when it’s completed then we have a pretty rational organizational construct in the industry that will benefit Delta.
John Godyn – Morgan Stanley
That’s very helpful. Thanks, guys.
Jill Greer
Thanks, John.
Operator
And we’ll take our next question from David Fintzen with Barclays Capital.
Dave Fintzen – Barclays Capital
A question for maybe Paul just picking up on some of the cost commentary for next year. As we look at this 5% to 7% non-fuel CASM pressure in the fourth quarter, is that the right run rate to think of generic, roughly?
I know it’s early to have specifics but is that the right run rate to think in the first half of next year? And then how fast do we sort of pivot as those investments benefit you and then we obviously overlap the raises from this year.
I’m just curious how should we think about first half versus second half and first half run rate?
Paul Jacobson
I think David, it’s a little premature to go into more specifics around first half cost guidance but I think if you look at salaries and wages the increases took effect in July and there’s another tranche to come in January. So the first half pressures are going to continue to be there.
I think as we get to Investor Day, we’ll have more details around the timing of some of these structural initiatives which we expect to begin to take hold in the second half of next year.
Dave Fintzen – Barclays Capital
Okay. Appreciate that.
And then maybe a broader question, on the move to re-fleet the domestic, how much concern or focus is there on what others are doing with regional jets in terms of how that could affect the revenue assumptions? I mean does it matter in terms of this project if United is re-fleeting with 70-seaters as well?
Or is it pretty much a Delta-specific project.
Richard Anderson
I can’t speak to what any other competitors around the world are doing with their fleets. I can speak specifically to the economics of the 50-seat fleet.
And by our point of view the 50-seat fleet reduction will be significantly accretive to our enterprise. Because, when you think about it in a really basic way, we’re going to reduce the number of airplanes we have on the enterprise because the 50-seaters have the long-range fuel prices that we have today are no longer economic, particularly in states lengths over about 450 miles.
So by up-gauging the domestic with MD-90 and 717s which are really capital efficient and then the 737-900s, we’ll be able to produce the same number of seats but we’ll do it with fewer airplanes, fewer takeoffs and landings which is where the scale leverage comes from, from the fleet changes. I don’t know about others.
I can just talk about what it does for the Delta network.
Dave Fintzen – Barclays Capital
And just in the sense of retaining that revenue on that lower-cost base, you’re pretty confident that its revenue that’s in the network, solidly in the network and you don’t need to worry about someone coming in and down-gauging and stealing some of that share?
Ed Bastian
No, because actually, we’ll be mindful of our frequency by market and that’s a key driver, and the 717 deal, particularly, gives us much better gauge and the second thing is, I don’t think customers want to fly 800, 900 miles on a 50-seater. Part of what we’re doing here is putting a better product in the market, better fuel efficiency, fewer airplanes in the air and our customers tell us they much prefer flying on mainline airplanes rather than 34-, 44-, and 50-seat airplanes.
Dave Fintzen – Barclays Capital
No, that make sense. I appreciate the color.
Thanks, everyone.
Operator
Will take your next question from Jamie Baker with JPMorgan.
Jamie Baker – JP Morgan
Hey. Good morning, everybody.
Richard Anderson
Good morning.
Jill Greer
Hey, Jim.
Jamie Baker – JP Morgan
First question for Richard, you’ve had another three months or so to think about how you’ll proceed after achieving Delta $10 billion net-debt target. Any current color in regards to how you’re thinking about pension pre- funding, share buybacks or a potential dividend policy?
Richard Anderson
Maybe I’ll start by answering at the same way I did three months ago and ask you what we should you think we should do?
Jamie Baker – JP Morgan
Well, quite frankly it’s up to your actual owners, but I speak to them a lot, all the analysts do, and I think we’re kind of at an inflection point here at $10. I think at a depressed share price, there’s appetite for buybacks, but if your trading $15, $16, $17 certainly our hope, I think a dividend policy is in the lead right now, pension pre-funding definitely bringing up the rear amongst most equity clients that I speak to.
Richard Anderson
Well, look that’s really good feedback and it’s really important feedback for us. So to give you our plan, we’re going to get through 2013 and complete our leveraging goal that we have.
I do think it’s worthwhile for us to continue deleveraging on the balance sheet because it’s so accretive when we take the non-op expense out. But at the same time, our Board and our management team understand our large shareholders want to understand what we’re going to do with our free cash flow yield when we get down to the end of 2013.
So I would extend an invitation, not only to the December 2012 annual Investor Day, but to the December 2013 annual Investor Day because I think we’re going to have pretty good color on what our next steps will be, and we are sympathetic to our shareholder desire to share in that free cash flow yield.
Jamie Baker – JP Morgan
Okay. And second question for Paul, you talk about this $1 billion mystery program of initiatives.
Unfortunately it comes after you identified an $8.04 x-fuel target for this year only to consistently time and time again back away from that figure. My first question is whether this is truly a new initiative or simply a do-over of what you failed to achieve this year.
Second question is it that if it is something new, why should we trust that things are going to turn out better this time? And is $8.04 still the right target to be using?
Paul Jacobson
I think, Jamie, as we think about targets what were focused on doing is identifying and communicating the billion dollars as clear and a transparent manner as possible, and we’ll plan to do that at Investor Day where there’s a better, longer forum to do that. The targets and the CASM is really a function of what our long-term plans are.
I’m not comfortable talking about that right now without discussions around how longer-term our strategic plans look as to capacity re-fleeting et cetera. I think the better avenue to do that is at Investor Day.
Ed Bastian
Jamie, this is Ed. The $1 billion that we’re referring to is candidly, part of that same cost-reduction initiative that we talked at the Investor Day last year as we laid out that plan.
As I think he said at that planned discussion it’d take probably about two years to implement and that’s where we’re at now in terms of the implementation. I think we said at the time and we said since that 8.4 was a calculation at a point in time, it’s obviously influenced by a lot of other factors, capacity levels which we continue to take down, the opportunity to move ahead with our pilots which obviously puts much higher pressure on it.
So from that standpoint it’s not backing down from our cost goals, we’re saying that we’re going to have to have a reset though due to the change in the macroeconomic factors, not anything that’s different from the $1 billion target.
Jamie Baker – JP Morgan
Okay. Thanks for the color, I appreciate it.
Look forward to hearing more in December. Take care.
Richard Anderson
Sure.
Operator
We’ll take our next question from Michael Linenberg with Deutsche Bank.
Michael Linenberg – Deutsche Bank
Good morning, everyone. Two questions here.
When we talked I guess it was Paul, you had talked about the fleet restructuring, Richard yourself as well, you talked about bringing on the 717s and the 737-900s. You also get the ability to add more, larger regional Jets, the 76-seaters and I believe you go from, I want to say, 255 up to 325.
Are those airplanes going to be sourced from your current partners? Or will Delta be in the market?
Will you be out there either putting those airplanes on your balance sheet or signing the master leases? And what’s the timing on that?
Ed Bastian
Well, we are in the process now of running a competition between Bombardier and Embraer and our expectation is that time around, by the end of the year we’ll have a pretty good idea of what direction we’re going to go. Our goal is to use that to take out a significant number of 50-seaters.
So we will look at all alternatives in terms of which balance sheet they end up on, the regional partner on Delta but when you think about it from a total liability perspective, what our goal is, is to take out the debt and significant costs that are part of owning all these 50-seaters. So when you think about say bringing in 40 76-seaters and taking out 60, 50-seaters, there’s a really good balance sheet and CASM trade there.
So when you think about, regardless of where it ends up in terms of the balance sheet, we want to take a significant amount of debt off, to the extent we put that on, by buying 76-seaters.
Michael Linenberg – Deutsche Bank
Okay. Super helpful, Richard.
And then my second question, this is to Paul, you ended the third quarter with $5.1 billion of cash and it looks like at year-end you’re going to be $5.2 total liquidity. I did see the blurb about that, it looks like you’re going to pay down $600 million of debt and it looks like by way of a call option here sometime, I think it’s in November.
Are you going to see any cash come in the door from your AMEX agreement? Can you just reconcile some of those different events?
Paul Jacobson
Well, the call that you referred to is related to the Pacific refinancing that we did.
Michael Linenberg – Deutsche Bank
Okay.
Ed Bastian
We’ve closed the cash to fund that, but if you look at our fourth quarter free cash flow from last year, there’s a similar pattern this year in terms of the flows from AMEX and miles purchases.
Michael Linenberg – Deutsche Bank
Okay. Great.
Thanks. Appreciate it.
Operator
We’ll take our next question from Savi Syth with Raymond James.
Savanthi Syth – Raymond James
Good morning, everybody. Just a question on the Latin American revenue.
It seems like unit revenue desolated more than the other regions and I was wondering, is that a result of capacity growth in the region or is there kind of a slowing down in demand?
Glen Hauenstein
This is Glen Hauenstein, and what we see moving forward in Latin America is an increase in capacity offered primarily by the foreign-flag carriers with both Lon and Tom being up significantly into South America, it’s primarily focused on South America and so yields and traffic in South America has come a little bit under pressure.
Savanthi Syth – Raymond James
Okay, understood. And then just a quick follow-up question.
On the 50-seat RJs, have you decided what you’re doing on the 41 that Delta is responsible for related to the updated agreement SkyWest ? Meaning, if you’re taking those back, are there costs related to that will be hitting in 2013 or so?
Glen Hauenstein
I think the individual sales that we’ve identified through the 50-seaters, we haven’t gone into that detail but we’re working through to identify specifically which aircraft are coming out. But as Richard mentioned, the goal is to make this as close to debt-neutral as we can.
Ed Bastian
Savi, this is Ed. The 41 you’re referring to, actually it’s 66 not 41 and yes, we’ve accounted for the 66 and they’re going to be either sat down, parted out or otherwise disposed of.
Savanthi Syth – Raymond James
Okay.
Richard Anderson
But that’s all in our forward-looking guidance that we’ve provided.
Savanthi Syth – Raymond James
Perfect the 41 I mentioned is because I think 25 is on SkyWest’s balance sheet. Correct?
Richard Anderson
Right but we got out of 66.
Savanthi Syth – Raymond James
Okay. Got it.
All right. Thank you.
Operator
We’ll take our next question from Glenn Engel, Bank of America Merrill Lynch.
Glenn Engel – Bank of America Merrill Lynch
Hi. Two questions please, one on RASM, if I look at the Asian RASM it was up six which was good but the industry was up nine.
Why would you be lagging?
Ed Bastian
We got a lot of new capacity in from the over flights and the stage link was up substantially in the quarter. I think that would be the primary differential, and then there’s also a lot of capacity in Japan.
So as we move forward with ANA and Jal, we are the largest carrier to Japan so there is a lot of pressure with new frequencies to New York, new frequencies to Seattle, new frequencies to San Diego and San Jose offered by the Japanese carriers as they complete their restructuring.
Richard Anderson
And, Glenn, the other, we restarted Detroit Inada, that’s in the quarter, that wasn’t in the prior year comp and that was another two point drag on the Pacific which we’ve now taken out of the system as of October 1.
Glenn Engel – Bank of America Merrill Lynch
Second question on the cost side, $1 billion is about 3% or 4%, one I’m never sure cost, is this cuts from what would’ve happened? So you would have had cost increases and you’re going to take the $1 billion out of the cost increases?
Or is this actually saying we’re going to lower the nonfuel costs by $1 billion? And is the $1 billion enough?
Paul Jacobson
Glenn, it’s never enough, right, so we’re always looking for ways to improve, but the $1 billion is the total amount of the initiative, not the net. There will be cost growth in other areas and the $1 billion is our primary means by which we’re combating inflationary pressures which we’re seeing in many parts of the business.
Glenn Engel – Bank of America Merrill Lynch
So the $1 billion will just hopefully keep you from your unit cost growing, you really wouldn’t expect it to bring the cost actually down at any point?
Paul Jacobson
We’re going to go through that on Investor Day Glenn.
Glenn Engel – Bank of America Merrill Lynch
Okay Thanks.
Operator
We’ll take our next question from Duane Pfennigwerth with Evercore Partners.
Duane Pfennigwerth – Evercore Partners
Hi. Thanks.
Good morning. On the fleet savings you expect, can you comment on the negotiate conditions on the 717s and specifically how much life will be left on those engines?
And how should we be thinking about a maintenance honeymoon, if any, as you transition to that fleet?
Richard Anderson
The airplanes come fresh out of their next check and fresh out of overhaul. Steve Gorman you want to give some particulars?
Ed Bastian
The only thing I would say to add to what Richard said would be that from an engine standpoint we would basically be taking on long-term power by the hour deal on the engines and so that probably would not be in a maintenance honeymoon period. And what Richard said on the check airplane check is exactly right, they’re fresh out of check as we receive them, of whatever their next check due was.
Richard Anderson
And the cost related to putting them in the Delta configuration with Delta seats, Delta delivery, Delta interior product, fresh overhaul, paint job and all the reliability mods, the airplane is delivered to us in that condition so that cost is not ours.
Duane Pfennigwerth – Evercore Partners
That’s helpful. Thanks.
And then just if I could follow up on the refinery, I think you talked about a longer term target of $300 million and I think the underlying assumption on that was a $16 jet fuel crack spread. Obviously, there’s a lot of volatility around that assumption but if we look now in the, call it $35 $40 range what would be the updated savings estimate be?
Richard Anderson
I think, Duane, I think when you’re looking at a $35 to $40 crack, you’re looking at it off the WTI versus a brent crack. We still feel confident in our $300 million annual target.
It has to do more with the relationship between all of the products that are produced at the refinery, but in spite of the volatility that we’ve seen, we remain confident in achieving that over the long term.
Duane Pfennigwerth – Evercore Partners
It seems there would be upside to that number just wondering why – I guess we’ll wait for Investor Day.
Richard Anderson
Well, there’s no question there’s upside to the number depending upon what crack spreads are, and we built our case on a conservative basis, and we think the refinery is going to be a very quick payback.
Duane Pfennigwerth – Evercore Partners
Thanks.
Operator
We’ll take our next question from Hunter Keay with Wolfe Trahan.
Hunter Keay – Wolfe Trahan
Thanks. Good morning, everybody.
Richard Anderson
Good morning, Hunter.
Hunter Keay – Wolfe Trahan
Hey. How are you?
Glenn a question for you; so we’ve noticed that Air France along with you guys obviously are adjusting some of the winter schedule pulling down or terminating actually, say some service to both Miami and DFW. I’m wondering if this is because the one world JV is turning out to be maybe a little more competitive than you guys initially assumed.
Or have they just been pricing sort of aggressively and irrationally there just to kind of drive you out. Maybe some color on that market dynamic would be helpful.
Richard Anderson
Hunter, I think that what we did when we plan the fall and winter was to look at the macroeconomics, the forward fuel curves, the forward demand set, the economic forecast for Europe and it really had less to do with competitive set because when you add it all out, the competition is actually offering – in aggregate, is offering less capacity this winter than they did last winter, and you pointed out one world is expanding, one world is expanding and that remains to be seen how successful that expansion is in the winter season but it was not in response to that, it was really in response to what we saw as the macroeconomic forecast.
Hunter Keay – Wolfe Trahan
Okay. Thank you, Glen.
And this is a little more of a sort of off-beat question. I’m not sure who would answer this, maybe Paul.
As you think about the implementation of the Volcker rule in the fourth quarter here and beyond, there’s going to be an impact not only as to how banks run their commodities trading desks and I know you guys have ramped up your own commodities trading operation, so it’s a two-part question, one, what do you expect the commodity trading landscape to look like after Volcker rule has been implemented? And two, is it going to impact how you decide to hedge your fuel?
Thanks a lot.
Richard Anderson
That is an obscure question.
Hunter Keay – Wolfe Trahan
I know. It’s obscure but it could have an impact.
I mean, Goldman is talking about potentially getting rid of its commodity-trading operation. I mean it’s a very less profitable operation then it was for the bank.
Obviously, your answer is what it is, you haven’t really thought about it too much at this point it seems, right?
Ed Bastian
Well, I mean first of all, I think the characterization about a trading operation compared to corporate hedging program I don’t think is necessarily a good one. We’re very confident in our execution and don’t see any significant changes coming through our counterparties.
We have close relationships with them; we’re comfortable with where we sit.
Richard Anderson
Hunter, this is Richard. First we would get an end-user exemption under the CFTC rules, so in terms of what it would require in terms of counterparty postings and the like, I think we’re going to continue business as usual in that regard.
The second thing is, is the over-the-counter feature will give us a lot more transparency into what the profitability of our counterparties may be in some of these trades. The third thing I’d point out is, it might be a good thing for a lot of people to take their passive money out of the forward market, because we still think there’ll be enough liquidity in the futures market, and one of the things that I still think the industry has suffered from is that the forward fuel market has become the next stock market.
And so you have so much passive money in the last 10 years that it flowed into the futures market that it might not be all bad to have a lot of that money flow back out of the market so that the supply and demand signals that we see in the underlying market tell you that jet fuel ought to be – brent ought to be about $20 less than what it is today. So maybe we get to more rational markets.
Hunter Keay – Wolfe Trahan
Okay. Great.
Thanks for that, Richard. Appreciate it.
Richard Anderson
You bet, Hunter. Thank you.
Operator
We’ll take our next question from Dan McKenzie with Buckingham Research.
Dani McKenzie – Buckingham Research
Hey. Good morning, guys.
Thanks. A couple questions here.
Paul if I could circle back to your commentary, margin expansion resulting from investment which would help take Delta’s earnings power to the next level once done. I believe Delta today is targeting 10% to 12% margins on a calendar basis.
Does that mean you’ll start to target 15% margins longer-term, something higher? What can you say to elaborate on that?
Thanks.
Paul Jacobson
Well, I think Dan, that’s taking it from where we are today to getting to that 10% to 12% level. We’ve put a lot of investment into the product and it’s paid tremendous dividends with our revenue performance.
There comes a point where you can’t always count on further revenue performance going forward, and we want to make sure that we’re restructuring to address the cost side of the equation too in order to contribute to that future margin expansion off of today’s current levels.
Richard Anderson
And to clarify, Dan, not to speak for Richard but the 10% to 12% that you referred to was return on invested capital not operating margins.
Ed Bastian
Right. Which was exactly where we are this quarter.
Dani McKenzie – Buckingham Research
I appreciate that clarification, thanks. And then secondly, Glen, I see the capacity cuts to Europe of course which are pretty steep on Delta’s part but I wonder if you can provide a little bit more perspective about the demand set, this just follows up on Hunter’s question.
I guess as you look ahead with respect to the inputs, does it factor in price elasticity from higher ticket prices? And I’m guessing it does but I guess I’m not sure how you go about measuring that elasticity given the macro here.
Maybe to ask a little differently, is the demand set really driven by corporate travel feedback, something different? Any additional color you can provide can provide would be helpful just given how the wheels look like they could potentially fall off the wagon.
Glen Hauenstein
I think our premise, our basic premise is airline seats are more elastic than people give him credit for and the industry has passed along their increases we see very little drop-off in demand. As a matter of fact in the month of October we’re running a month to date load factor that’s around 84%, so we’re maybe at historic highs despite improving yields.
Is that your question or is it more specific to Europe?
Dani McKenzie – Buckingham Research
Yeah, I guess it was really specific to Europe, just given the volatility in the macro backdrop there which could really disrupt demand trends.
Glen Hauenstein
Absolutely and I think again this is similar to a comment I made in last quarter, is the headlines don’t match our results. And what we see through the winter months is actually some very positive signs in terms of European command, the market responds to the capacity discipline.
So we’re very optimistic as we run through what’s historically the winter odysseys and the weak five months of the year and we’re going to post very favorable improvement in unit revenues despite not only the economic headwinds but the headwinds of the currency on a year over year basis. So we’ve mitigated, it looks like we’re going to mitigate both of those and the demand is actually moving both ways, so European multinationals who are having trouble doing business in Europe are actually coming to the U.S.
to do business, and so there’s lot of dynamics that are appealing in that I think.
Dani McKenzie – Buckingham Research
Terrific. Thanks so much.
Appreciate it.
Operator
We’ll take our next question from Bob McAdoo with Imperial Capital.
Bob McAdoo – Imperial Capital
My questions have all been answered. Thanks.
Good job, guys.
Ed Bastian
Thanks, Bob.
Richard Anderson
Thanks, Bob.
Jill Greer
And, Cindy, I think this is going to be our last question coming up.
Operator
Our last analyst question will come from Helane Becker with Dahlman Rose.
Helane Becker – Dahlman Rose
Thanks, Jill, for squeezing it in. I appreciate it.
Just a question about Atlanta. You guys talked a lot about picking up corporate share in New York, but I think when Southwest bough AirTran and they start to take over and reconfigure their aircraft, they’re getting rid a lot of the front seats.
So can you just talk about what you’re seeing in Atlanta in terms of both pricing on the walk up side and in terms of share gains?
Glen Hauenstein
This is Glen, how are you?
Helane Becker – Dahlman Rose
Good, thanks.
Glen Hauenstein
We see a very favorable dynamic going on in Atlanta in the short, medium and long-term since AirTran has been taken over by Southwest, they’re down almost 50% in capacity from what AirTran’s peak was as you look out into the forward months. And they are rationalizing more and more cities.
I believe last week they announced that they were stopping service next spring to Charlotte, to Rochester, New York and to Flint, Michigan from Atlanta which is in addition to the many cities they were already closed. Their departure levels are down to about 177 a day but the transition has been I think from our perspective difficult because if you look at the key 100 data that comes out in the spring, AirTran and Southwest have a lot of trouble filling their seats so they put some very aggressive sale fares out there.
We think those will be mitigated over time as they continue to rationalize capacity and we’re very optimistic as we go through the winter schedule and the spring schedule that we’ll have a lot of traction here in Atlanta.
Helane Becker – Dahlman Rose
Okay. So you would say that you we’re seeing share gains from them, is that it?
Glen Hauenstein
Absolutely
Helane Becker – Dahlman Rose
Okay. Great.
Thanks. We’ll see you in September.
Jill Greer
Thanks, Helane, and that is going to wrap up the analyst portion of the call and so I’ll hand it over to you Ned Walker.
Richard Anderson
Okay. Thanks very much, Jill.
Cindy, if you could go over the process again for queuing up to ask a question for the media and once again for the media, we would like to have one question with a quick follow-up and hopefully we’ll be able to accommodate everyone. Question-and-Answer Session
Operator
Thank you. We will now take questions from the media.
(Operator Instructions). We’ll take our first question from Josh Freed with the Associated Press.
Josh Freed – Associated Press
Good morning. You mentioned earlier that you’re seeing that customers are willing to pay a premium to fly on Delta and just wondering if you could say more about that.
I mean are you seeing that premium show up in fares? Or are you thinking of that is more of a sort of general premium because you’re also collecting out baggage fees or upgraded seats or that kind of thing?
Where are you seeing that premium show up?
Richard Anderson
Primarily, in corporate share and yield. But the airline is running very, very high load factors on an annual basis.
So it’s very hard to take in traffic and what we’re seeing is a higher and higher share of the higher-yielding customers selecting Delta.
Josh Freed – Associated Press
All right. Thank you.
Richard Anderson
Thank you.
Operator
And we’ll take our next question from Andy Compart with Aviation Week.
Andy Compart – Aviation Week
Good morning.
Richard Anderson
Hey, Andy.
Andy Compart – Aviation Week
You guys are doing well. Just a couple quick questions.
On the refinery, you said that revenue prediction is pretty much staying the same. I’m wondering if the cost estimate you gave at the beginning which I think was around 100 million, if that has stayed the same or if you you’ve had some unanticipated costs or anything?
Richard Anderson
Hey, Andy. Richard, good question.
Our turnaround costs are tracking quite close to plan through the end of the year and the turnaround will result in our being at full production probably near the end of 4Q but for sure by 1Q.
Andy Compart – Aviation Week
And just to be clear on the regional jet timing. Can you expect to make a big decision between LaGuardia and Embraer by the end of this year?
And then...
Richard Anderson
Andy, that’s our plan.
Andy Compart – Aviation Week
And then, at that point do you think you’ll have agreements in place which regionals are going to operate which jets and where the 50 seaters are going to be dropped. Is that going to be wrapped up by then?
Richard Anderson
Yeah, we still have that we wrapped up, Andy.
Andy Compart – Aviation Week
Is that the same time table or different?
Richard Anderson
We hope that it’s around the same timetable.
Andy Compart – Aviation Week
Okay. Thanks.
Richard Anderson
You bet. Thank you for calling in.
Operator
We’ll take our next question from Karen Jacobs with Reuters.
Karen Jacobs – Reuters
Hi. I had a follow up on the Lombardi and Embraer content.
How many planes are you looking to buy?
Richard Anderson
We haven’t finalized the number of airplanes. Under our agreement with our pilots we have the ability to take up to 70 additional 76-seat airplanes, so it would be some number less than 70.
Karen Jacobs – Reuters
Okay. And then I had another question, sort of a question about the cost-cutting plan.
Have you ruled out layoffs as you look to drive down costs over the next year?
Richard Anderson
Right. We have ruled out layoffs.
We have a strong tradition at Delta of managing our unit cost per person now by using voluntary programs and pushing productivity throughout our business. So it’s a really important part of the strong relationships we have with our employees.
We want them to be secure in their jobs so they can provide really good customer service to our customers.
Karen Jacobs – Reuters
Thank you.
Operator
We’ll take our next question from Mary Jane Credeur with Bloomberg News.
Mary Jane Credeur – Bloomberg News
Hi, folks. Can you talk a little bit about how you’re going to afford that new pilot contract?
Richard Anderson
Hi, Mary Jane, this is Richard. Sorry for not saying hello.
When you look at the overall value that we’re going to create as a result of unlocking the ability to refleet plus the productivity that has been built into that agreement, we’re confident that it will be an important part of our ability to get to unit cost over the next couple of years to improve our margins and our return on invested capital.
Glen Hauenstein
And, Mary Jane, this is Ed. One additional thing, we also reduced the profit sharing going forward and that’s an important part of helping to fund that cost growth.
Mary Jane Credeur – Bloomberg News
Sure. Okay.
Thank you.
Operator
We’ll take our next question from Ted Reed with TheStreet.
Ted Reed – TheStreet
Thank you. Rich, you said that you would applaud the industry consolidation, that it would be quite good for Delta but the contemplated transaction would make a much stronger competitor to Delta in the Southeast across the Trans-Atlantic and probably elsewhere.
SO what’s the rationalization for saying that?
Richard Anderson
Ted, good question. When you just think around the world and it’s not just in the U.S.
but around the world, the industry consolidation has really helped regions around the world, and the region I think about is Latin America which has probably led the worldwide region, the regions around the world in consolidation. And so you end up with just a much more rational industrial organization, and when you have a much more rational industrial organization the participants in the organization tend to do better.
So we think we have competitive advantages that will allow us to continue to sustain the distance that we put between ourselves and the rest of the industry, and of course, we don’t intend on giving up any market share.
Ted Reed – TheStreet
All right. Thank you.
Richard Anderson
Okay, Cindy. We have time for two more quick questions.
Operator
Okay. We’ll take our next question from Kelly Yamanouchi with the Atlanta Journal-Constitution.
Kelly Yamanouchi – Atlanta Journal-Constitution
Hi, there. I was wondering, as Southwest and AirTran are re-gearing their networks, are you starting to see noticeable frequent-flier loyalty gains or new AMEX card holders from them?
Richard Anderson
Hi, Kelly. This is Richard.
I’m going to ask Glen to answer that.
Glen Hauenstein
Hi, Kelly. It’s Glen.
How are you?
Richard Anderson
Hi, there.
Glen Hauenstein
We just had record acquisitions for the last several months but it’s primarily acquisitions in both New York and Atlanta so we’re very excited about the card and the AMEX card it looks like (inaudible) next few months and I think we are seeing share gains not only in our hubs but across the entire network.
Kelly Yamanouchi – Atlanta Journal-Constitution
Great. And I was also wondering if there’s an idea for a timeframe for deployment of the additional 76-seaters once you reach a deal?
Richard Anderson
Kelly, this is Richard. Typically when you place an order for an airplane, the earliest you get it is 16 months to 18 months after you placed the order.
So you would expect just like on our 73-900ER order, we placed that, it’ll be 2 years ago this August or August 13 and we’ll end up taking the airplanes somewhere around, the first airplane about 26 months after the order. So, and then you end up taking about a dozen the year, something like that.
So I hope that helps give you some timeline.
Richard Anderson
Okay. One more final question, Cindy.
Operator
We’ll take our last question from Linda Loyd with Philadelphia Inquirer.
Linda Loyd – Philadelphia Inquirer
Hi. Thank you very much.
I have a question about the Trainer refinery. The refinery before it was reconfigured was 185,000 barrels a day.
With the reconfiguration, is it still that much oil? And how many barrels of jet fuel will you be producing when you’re at full run rate?
Paul Jacobson
Good morning, Linda. This is Paul.
Thanks for your question. None of our modifications are intended to expand production at the plant, so we remain at 185,000 barrels a day.
We said that we intend to get about 50,000 barrels a day of jet fuel when we complete the modification sometime during 2013, but we will be producing significantly more jet fuel then ConocoPhillips produced when they ran the plant beginning in the first quarter.
Linda Loyd – Philadelphia Inquirer
Thank you very much.
Ed Bastian
Okay. Hey.
Thank you, Richard and Paul, and that does conclude our September quarter call. Well, see many of you at Investor Day in New York City on December 12 and get back on the telephone with everyone here for the January quarter results.
Thanks again, everyone.
Richard Anderson
Thank you, all.
Operator
And that does conclude today’s conference again. Thank you for your participation today.